Buy to Let Self-Employed
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The Financial Conduct Authority does not regulate some Buy to Let Mortgages.
Your property may be repossessed if you do not keep up with your mortgage repayments.
Buy to Let Self-Employed
Anthony McQuilliam talks us through Buy to Let self-employed mortgages.
Podcast approved by the Openwork Partnership on 24/04/2024.
What should you consider if you are self-employed and looking for a Buy to Let mortgage?
When you’re applying for a mortgage to a property for yourself to live in, all of the affordability checks are done on your personal income. Lenders use 4.5 times your income to calculate how much you could borrow, and usually base that income on the average of your last two years.
Things change when you’re going down the Buy to Let route. Some lenders have a minimum income requirement, which is often for you to earn over £25,000 profit per year. That opens up the majority of the market. But there are some lenders that will be happy as long as you have any form of income.
The majority of the affordability checks on Buy to Let properties are solely done on the rental income. Lenders want to be comfortable that the rent you receive can more than cover your mortgage payments, now and in the future. So the amount you’re earning from your business is generally less important for a Buy to Let mortgage.
Should I Buy to Let as an individual or through a limited company?
Both have their pros and cons and as mortgage advisers we aren’t qualified to give tax advice, but being self-employed, the chances are you’ve already got an accountant. They’ll be able to tell you the best route to go down.
One of the downsides of buying through a limited company is that it’s more of a speciality lending area, so interest rates tend to be slightly higher than if you do it in your own personal name.
On the other hand, the government brought in a change called section 24 which affects taxation. For example, if you had a rental income of £1000 a month and your mortgage payment is £600, previously you’d only pay tax on that £400 profit. The change means that now, if you buy in your own personal name you’d pay tax on the full £1000 rental income.
With the limited company option you can treat the interest on the mortgage as an expense. So you’d only pay tax on the profit made once you’ve deducted the interest payment. But that’s just an overview – for more details about it you’d need to speak to a tax advisor.
What is a special purpose vehicle or SPV?
An SPV is essentially a limited company that you set up specifically to buy and hold your properties. Your income and your expenses will all be put through that particular business – it’s just built specifically to hold property.
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How do lenders assess income for a self-employed Buy to Let mortgage?
As I mentioned earlier, when you’re buying a property for yourself to live in, lenders take the average of your income over two years and multiply that by 4.5 to calculate how much you can borrow.
But with Buy to Let the affordability checks are solely based on the rental income for the property. Some lenders will lend to you as a Buy to Let investor as long as you have some other form of income.
A lot of lenders do set a minimum income requirement in the region of £25,000, to make sure that if your tenant can’t make their rental payment, you can still pay the mortgage in the meantime. If you can prove you earn more than £25,000 for the year, most lenders will be able to accept you – as long as the rental income also stacks up.
What is top slicing and how does it work?
Interest rates have gone up quite substantially over the past year or so, which is making it slightly harder to get the lending you need for a Buy to Let property. That’s especially true in the south east.
Top slicing can help if you’re in a position where the lender believes that the rental income you get from the property won’t be enough to get you the loan you need. But if you have a high amount of personal income, some lenders can bring some of that income into the affordability check.
So if the rental income is slightly short lenders will ‘top slice’ your personal income to increase the amount you can borrow. They are happy that you’ve got the surplus income to cover any deficit should you not be making money on the property in the future.
How can a mortgage broker help somebody that’s self- employed looking for a Buy to Let mortgage?
When you’re buying Buy to Let properties it’s so important to have a close relationship with a mortgage advisor. There are a lot of lenders out there and we can get you a rough Agreement in Principle to prove you can afford a property when you’re making an offer.
But it’s all going to come down to what the rental income is. You could have an Agreement in Principle for £200,000 and one property might give you £1,000 in rent, while another might give you £600. The higher rent may still be affordable and the lender will accept that, but the lower rental income may not fit their calculations.
If you have a close relationship with your mortgage advisor, you can send property details over to them to figure out whether the rental income will stack up for you to borrow what you need.
Your home may be repossessed if you do not keep up with your mortgage repayments.
Some buy to let mortgages are not regulated by the Financial Conduct Authority.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
For specialist tax advice, please refer to an accountant or tax specialist.
Podcast approved by the Openwork Partnership on 24/04/2024.
Your home may be repossessed if you do not keep up with your mortgage repayments.
